Salary sacrifice explained - Clerical Medical

1 Salary sacrifice explainedFor employersWhat is Salary sacrifice ?A Salary sacrifice happens when an employee gives up their right to part of the cash remuneration due under their contract of employment. Usually the sacrifice is made in return for your agreement to provide them with some form of non-cash benefit. They may also sacrifice a one-off item such as a leaflet focuses on using Salary sacrifice as a means to improve retirement planning and pension aspects of Salary sacrificeSalary sacrifice is a matter of employment law, not tax law and will normally involve changes to an employee s contract of employment. The nature of the contract of employment is a matter between the employee and yourselves. If you are an employer, we recommend that you should seek legal advice before deciding whether or not to implement a Salary sacrifice arrangement and to decide the best way of documenting these is no requirement for you to inform HM Revenue & Customs (HMRC) that a Salary sacrifice scheme has been set up.

2 Many employers will do so for reassurance that they are accounting for the correct amount of income tax and National Insurance contributions. If HMRC approval is given to the scheme it is on the understanding that approval will cease to apply if there is a significant change in the terms, conditions or operation of the order to decide whether a Salary sacrifice is effective or not, the local tax inspector has to consider the true construction of the revised contractual arrangements. If you decide to go down the route of Salary sacrifice , full details of the scheme and of the new contractual arrangements should be provided. The inspector will need to be satisfied that employees entitlement to cash payment has been reduced, that a non-cash benefit has been provided, and that the employer is not simply meeting their employees own financial commitments. HMRC does not give advice on whether a scheme is effective before the scheme is set up and in operation.

3 However, it does publish a great deal of information and guidance regarding Salary sacrifice on their website at What are the steps to a successful Salary sacrifice ?We can t guarantee whether a Salary sacrifice arrangement will be acceptable to HMRC as the final decision is theirs. What we can do is explain what we believe are the steps you need to go through based on our understanding of current HMRC practice. The documentation to record Salary sacrifice must be effective. This means that there must be written evidence that the contract of employment has been varied and that the employee does actually become entitled to reduced cash remuneration. This can be documented in one of three ways, which will be covered later. The timing must be right this means that the employment contract must be effectively varied before the changes are implemented. In practical terms, any right to receive cash wages/ Salary must be given up before the employee is entitled to receive the remuneration.

4 This will also be given further consideration - CorporateN0417N66297210A4 PTCMYKX2520 Clerical Medical (SW) Salary sacrifice guide for employersN28-Feb-201714:53 328/02/2017 14:53 The sacrifice must be irrevocable, ie generally it mustn t be possible for the employee to return to the original higher cash Salary . It is possible however to have a variation clause that means changes can be made 12 months or more after the initial change. This may be acceptable to HMRC. Documenting the Salary sacrificeThe documentation needs to demonstrate that the contract of employment has changed. This can be achieved in one of three ways:Rewriting the contract of employment, either in part or in out the changes in an addendum to the main contract (for example, using a pro forma or a letter). Informing a group of employees of changes that are being made. For example, it s been decided that Salary sacrifice would be adopted from a specified date and that if employees don t opt out within a specified timescale, this wholesale change will be practical terms, approach 2 will usually be used as it may not be good practice to adopt Salary sacrifice for a whole group of employees.

5 According to HMRC, employees don t have to consent specifically before being included in the scheme. As long as the terms are made known to all employees before the scheme is introduced, employees are deemed to have accepted the variation to their contract of employment by not opting-out. This should only apply to occupational pension schemes. As with automatic enrolment, it would be in conflict with employment, contract and data protection law to adopt this approach for contract-based schemes. There is no HMRC approved wording for a letter to employees, and so we can t take responsibility for providing one. The terms of existing contracts of employment will need to be considered and, whichever method of introducing Salary sacrifice is chosen, you will need to ensure that these arrangements are properly documented. However, assuming you have done this, the following is an example of the type of letter that might be written:123 Dear employeeThis letter is to inform you that with effect from [date] your Salary will be reduced by [amount of reduction] from [starting Salary ] per annum to [final Salary ] per annum.

6 The sum of [pension contribution] is to be paid into a pension scheme for your benefit upon retirement. The letter needs to be produced on company headed paper and should be signed by both the employer and the employee. Timing of Salary sacrificeThe timing must be right in order for the sacrifice to be considered successful. This means that the sacrifice must be documented and the remuneration given up before the date it is treated as received for Schedule E tax an employee, this date will normally be the earlier of: the date the payment is made, or the date the individual becomes entitled to the a company director is involved, there are additional issues to consider and the sacrifice must be completed before the date the remuneration is credited in the company s accounts or records. Where remuneration is determined during the course of a company s accounting year (or other period in respect of which remuneration is paid) it is deemed to be paid at the end of that year or period.

7 Where the amount of remuneration is determined after the end of the period to which it relates, it is deemed to be paid on the date the amount is determined. In relation to a bonus, this can be waived as long as this is completed before the bonus is treated as received for Schedule E tax 428/02/2017 14:53 QWhen is Salary sacrifice not effective?A Salary sacrifice is not effective if the arrangement enables the employee to continue to be entitled to the higher level of cash remuneration. In other words, they have merely asked their employer to apply part of that cash remuneration on their , employees may have the option to opt out on the anniversary of the commencement of the Salary sacrifice . They may also be able to opt out if they experience a lifestyle change such as marriage, the birth of a child, separation or divorce, death of a partner or child or a change from full-time to part-time work.

8 HMRC have confirmed that opting out of a pension scheme or stopping contributions under the automatic enrolment provisions is a valid reason to allow a Salary sacrifice arrangement to be the pension contribution as a result of Salary sacrifice is treatedThe contributions paid into a pension scheme as a result of an effective Salary sacrifice arrangement are treated as normal employer contributions and should be allowed as a deduction against taxable are two ways that a Salary sacrifice arrangement could be implemented. NationaI Insurance benefit retained in Salary . National Insurance benefit used to boost pension Insurance benefit retained in salaryBecause the employee s Salary is being reduced, they will not have to pay National Insurance contributions on the amount sacrificed, so this can be used to increase their take home is an example of how this might work, assuming earnings of 25,000 a year and employee contributions of 5% of gross Salary .

9 Gross earnings 25,000 23,750 Total gross pension contributions 1,250 1,250 Take home pay 19, 19, of the gross Salary has been given up and since there is no National Insurance to pay on the amount sacrificed, the employee s take home pay has increased by figures are based on tax and National Insurance for 2017/2018 and a single personal allowance of 11,500. The value of the tax benefits of a pension plan depends on an individual s circumstances. Individual circumstances and tax rules may change in the Salary sacrificeAfter Salary 528/02/2017 14:53 QNational Insurance benefits used to boost pension contributionPension contributions can be boosted by using the National Insurance saving that will be made when using Salary sacrifice . Here s an example of how it might work, assuming that the employee earns 25,000 a year with both the employer and employee contributing 5% of gross this example the employee has sacrificed a slightly higher amount so that their take home pay remains the same.

10 This results in a pension contribution which is higher, compared to contributing without using Salary total pension contribution could be increased by a further if the employer NIC saving is also figures are based on tax and NI for 2017/2018 and a single personal allowance of 11,500. The value of the tax benefits of a pension plan depend on an individual s circumstances. These circumstances and tax rules may change in the have tools available to help you calculate the maximum sacrifice that can be made without impacting on the employee s net pay. Please speak to your financial adviser for more of Salary sacrificeThere will be a saving in National Insurance contributions for employees who take up Salary sacrifice which can be used to offset the cost of pension contributions or increase the amount invested. There may be further benefit to employees if the employer National Insurance saving is also passed on as an additional contribution to the pension scheme.